Monday, 7 August 2017

Towards the end
of last week I noticed a flotsam on my Twitter feed coming from a
storm involving NN Taleb and the prominent British classisist Prof
Beard. The origins were in a BBC schools animation
that depicted a Roman soldier as dark skinned. This elicited a
response on Infowars that the BBC was re-writing history. I was
interested in this because that week my family had driven down to the
Vindolanda and Roman Army Museums on Hadrian’s Wall and I had
been struck that a significant portion of the garrison at Vindolanda
came from Hama in Syria, a region familiar today as being a source of
refugees into Europe. Taleb
was attacking Beard for being part of the conspiracy. Since the
evidence for Syrians at Vindolanda comes from written
records discovered in the 1970s, I cannot believe the ‘left’
are that competent at formulating such a clever consipiracy.

[PS there are links between Financial Mathematics and the mathematics of population genetics: Alison Etheridge
is prominent in both fields. My gut instinct was the apparent lack of
non-Caucasian genes in the current British population was not evidence
of their having been non-Caucasian Romans in Britain. @mpigliucci explains this and highlights how Taleb is a victim of his own biases.]

I was also
interested because Taleb was involved. Along with many academic
mathematicians working on finance I do not have a strong affinity
with Black Swan or Fooled by Randomness. The reason why is as
follows. Taleb, along with other ‘public’ financial
mathematicians like Elie
Ayache and Doyne
Farmer, were part of a cohort of applied mathematicians,
engineers and physicists who entered finance in the 1970s and 1980s,
were successful, became rich and have used that wealth to direct
public perceptions of financial mathematics. At the time, option
pricing was accomplished by solving partial differential equations
and these ‘quants’ had expertise rooted in dynamical –
deterministic – systems (note that Taleb’s mathematical PhD in Management Science was awarded in
1998, not before he went into Finance with an MBA). There is a sense
amongst most actuaries and financial mathematicians, trained in
probability theory, that Taleb’s books resonate with this audience
because the books highlight the significance of randomness, something
these people were not really educated in. As one senior British
actuary said to me: “What does Taleb think actuarial science has
been concerned with for 300 years if not Black Swans and not being
Fooled by Randomness”. This frustration reflects decades of
‘quants’ in banks regarding actuaries as being ponderous
dinosaurs.

A profile
of Taleb by Malcolm Gladwell (who shares Taleb’s skill for
simplification) suggested that Taleb’s ideas are founded on his
experiences of the Lebanese civil war and surviving cancer. While
Taleb dismisses this I wonder if there is some truth in the theory.
Taleb is concerned with how people face up to uncertainty and how
they respond, discussed most recently in Antifragile. I share this
concern but have been dissatisfied with Taleb's arguments, in
particular I feel that Taleb believes,
like many of his colleagues, that there are individuals peculiarly
able to make judgements under uncertainty. This was part of the
motivation for writing Ethics in Quantitative Finance.

My reasoning is
based in mathematics, which is subtly different to Taleb's which just
uses mathematical symbolism. Consider a closed system of 100 agents,
each initially endowed with $45. Now, at each time step each agent
randomly gives another agent $1. What do you think the distribution
of money should be? The immediate thought might be the distribution
would remain uniform, with a little noise. However, this not the
case, as presented in
a nice simulation. Some people will end up with lots of money,
others will be bankrupted. The rich can become rich simply through
luck, not skill. This should not perturb the likes of NN Taleb or
Robert
Mercer, since the model does not consider how genius might skew
the distribution, extending the right tail at the expense of the
middle. It is more challenging to the 'left' who might seek to
implement policies that make the wealth distribution more uniform,
since such policies might be considered to be equivalent to pushing
water up hill.

Moving on, there
are some points that were made with respect to my last post about
maths in economics that are important in understanding my approach.
One
comment was that

The more fatal weakness of this line of argument seems to me the
starting assumptions: mathematics involves "identifying how we
see relations between objects." That seems right, but left
undefined here is the term "objects." What exactly is an
object?

In mathematics, an object is something we can
quantify. Now comes the problem: in economics, what we need to
identify is the relation between emotions (greed, fear of loss,
investor euphoria, etc.) and behavior (buying, selling, tolerance for
risk, and so forth).

Alas, this requires that we
mathematize emotions. To my knowledge, no one has succeeded in doing
this in some 8,000 years of recorded history.

I take a less pessimistic view. Plato split the soul into three
parts. The epithymetikon (‘from the heart’) was the part
of the soul concerned with carnal desires, sometimes represented as a
black horse. Alongside this was the thymoeides (‘spirit’)
and represented energy and the motivation to act, this was sometimes
represented as a white horse. The third component was the logistikon
(‘reason’, from logos the Greek for ‘what is said’) or nous
(‘mind’) that distinguishes right from wrong, which Plato
associated with the Athenian temperament. The logistikon was
sometimes represented as a charioteer controlling the other parts of
the soul, making sure that the spirit would not become dominated by
carnal desires, which would be wrong. Through the medieval period
these ideas became refined into one of balancing passions and
interests. This did not involve quantification, which is only a
small part of mathematics, but by identifying a balance point, which
involves measurement. Adam Smith's great contribution, according
to Albert Hirschman, was in enabling the quantification of
passions and interests through money, precipitating capitalism tied
up with utility maximisation. My argument in EQF is that part of the
long story of financial mathematics is concerned with this balancing
of passions and interests and this was considered to be a question of
Justice. This predates Smith's quantification of passions and
interests,. When mathematics was dominated by geometry, this was
considered in terms of proportions, but with monetisation came
arithmetic.

Justice, according to Socrates and taken up by Plato and Aristotle
and their heirs, is the quality that a complex, functionally
differentiated system (a society) needs to enable it to work well.
On this basis a society is Just when it enables individuals, who all
have different capacities and capabilities, in the society to do
their best by allowing them to do what they are best at. This
relates to comments relating to the use of mathematics in economics
raises, that people are different and so cannot be reduced to a
mathematical representation (e.g. "The rigidity of mathematics
makes it difficult to fully capture the richness and complexity of
human behaviour "). This is true, however I highlight how
financial mathematics is founded on reciprocity which is a component
of Justice, and this is the fundamental invariant not just in
finance, social systems in general but across any functionally
differentiated system. The mathematics of the Fundamental Theorem of
Asset Pricing is not involved in quantification but is concerned with
ensuring Justice.

On the basis of this definition of Justice the universe is Just,
since it works well as a complex, functionally differentiated system.
It is concerned with different things being in the correct balance
and is different from the idea that justice is based on everything
being the same, which might be characterised as a 'left-wing'
approach.

Now we can return to Taleb's account of "Antifragility"
that starts with

Antifragility is ... behind everything that has changed with time:
evolution, culture, ideas, revolutions, political systems,
technological innovation, cultural and economic success, corporate
survival, good recipes (say, chicken soup or steak tartare with a
drop of cognac), the rise of cities, cultures, legal systems,
equatorial forests, bacterial resistance … even our own existence
as a species on this planet. And antifragility determines the
boundary between what is living and organic (or complex), say, the
human body, and what is inert, say, a physical object like the
stapler on your desk.

This excerpt immediately raises the question: what is the difference
between antifragility and Socrates' conception of Justice.
Critically I have removed part of the text, which actually begins

Antifragility is beyond resilience or robustness. The resilient
resists shocks and stays the same; the antifragile gets better.

Suggesting the antifragile is about improvement, but I don't think
this establishes any clear water with the ancient philosophers.
Furthermore the argument that the best antidote to fragility is "skin
in the game" is not so different from the Enlightenment
attitude, espoused from Locke to Kant, that only property owners
could participate in democratic politics. The issue here, and
dominated British politics for much of the nineteenth century, was
that this excluded the majority from participating in democracy.
Taleb's conclusion refers to the Golden Rule "Do to others what
you want them to do to you".

These observations suggest that Taleb's argument in Antifragile is
close to mine in EQF. The difference is I focus on how the idea of
Justice is embedded in financial mathematics, why this is so and what
it implies. My conclusion is that in oredr to be able to manage
radically (Knightian/non-ergodic, etc.) uncertainty a broad range of
opinions need to be solicited and considered and so markets are
discursive arenas and must address truth, truthfulness and rightness.
Taleb suggests the essence of his book is "Everything gains or
loses from volatility. Fragility is what loses from volatility and
uncertainty." This seems a little trite to me, echoing the
actuary: "What has civilisation been worried about for 4,000
years?" The problem, as I see it , in Taleb's book is that he
leaves himself open criticisms captured in a paper
by Andrea Terzi (in what I would class as a 'left-wing' journal).
The point Terzi makes is

Taleb admits that the system cannot be made foolproof to BSE [Black
Swan events] but believes it can be made more resistant through some
form of economic and social Darwinism. His prescriptions include
consenting that what is fragile breaks early and never gets too big
to endanger the system should a BSE appear; letting economic players
who make errors be punished for their failures; not precluding
recessions from mopping up the system from the unfit to survival; and
not indulging in debt.

Taleb seems to have slipped into pseudo-Nietzschean philosophy that
distinguishes man and superman. He seems to identify with the
supermen and denigrates most scholars as 'imbeciles'. This view has
been supported in the evidence of responses supporting Taleb's attack
on Beard from, what look to me like, neo-Nazis. My concern is that I
feel the problems of finance, that Taleb purports to solve, are about
an obsession with identifying 'geniuses'
at the expense of deliberation and doubt.

I am not allowing comments on this article as I anticipate they will be dominated alt-right abuse.

Thursday, 27 July 2017

There are three
types of mathematician: those who can count and those who can't.

It takes a few
seconds to get this joke the first time you hear it, and every once
and a while when I tell it to a class one student will raise a hand
and asked for the 'third type'. Its a good joke because it
challenges assumptions, here the assumption is that mathematics is
concerned with arithmetic, which is just a minor branch of number
theory.

At the end of June,
before I went on holiday, I had been thinking about the role of
mathematics in democracy. This was prompted by an invitation from a
Norwegian mathematician to do some work in the topic. I contacted
@BrendanLarvor asking who were the main scholars in the area. He
pointed me to a recent paper that discusses a key issue. Many people
see the role of mathematics in democracy as educating the public so
that they can do their own calculations. Citizens are able to
calculate the cost/benefit of Brexit, for example. But calculation
is not what mathematics is concerned with. The paper is not an easy
read but highlights the awareness amongst (some) mathematicians that
mathematics is not straightforward. In particular the phrase "the
role of mathematics in formatting the world as we experience it"
resonated with me as being a key issue.

This led me to
think about the role of mathematics in defining how the disciplines
of finance and economics are arranged. A consequence of this was I
invited people to answer a short survey on "Does a mathematical
proof enhance a financial theory?". The survey was widely
distributed (via @MarkThoma amongst others) but only elicited seven
responses. The results are here (the survey is still open, btw). I was disappointed that only seven
people seemed to share my interest to the degree that they would
spend a little time answering the question. I concluded that either
people were disinterested (possibly because they thought the question
was trivial, like "Does water flow downhill") or that they
did not understand the question (they do not feel confident about
what is meant by a 'mathematical theory').

On returning from
holiday, I noticed that @freakonometrics had retweeted an article
from aeon about how "By fetishising mathematical models,
economists turned economics into a highly paid pseudoscience"

I have the opinion
that almost all of the criticism of the use of mathematics in
economics stems from a lack of understanding of what mathematics is,
reflecting a general ignorance in economics that has led to the
failure of mathematics in economics. To get an idea of my
frustration consider the following argument about journalism. One
might observe that there are many more photographs in newspapers
today than there were 100 or so years ago. Using the argument that
the problems of economics are in its use of mathematics is rather
like saying the problems of contemporary journalism is down to
photography.

The starting point
of understanding the role of mathematics in finance and economics is
to appreciate what mathematics is concerned with. Mathematics is
concerned with identifying relations between objects: bigger smaller,
to the left/right, symmetry, before/after and so forth. Top class
mathematical research is concerned with discovering new ways of
representing how things are related. More every-day research shows
that A=B or how you go from A to B. Once the mathematicians have
done their work, of "formatting the world as we experience it"
by identifying how we see relations between objects, others then get
on and do things. Mercator figured out how to make maps - a
mathematical operation - sailors then used the maps and in the
process forgot that what they were doing was using mathematics.

Mathematicians rely
on other disciplines providing problems, mathematics, whatever the
caricature of a mathematician dealing with abstract ideals will say.
Mathematics then figures out a way of looking at the problem - the
relations between its components - so that a solution can be found.
The caricature of the mathematician is explained by how mathematics
is presented. Rather than starting with the problem and then
breaking it down into its components, mathematics is presented back
to front. It starts with the components and then shows how these
combine to deliver the observed phenomena. This 'back-to-front'
approach originates in Euclid. The theorems at the end of Euclid's
Elements were all well known hundreds, if not thousands, of years
before he wrote The Elements around 300 BCE.

Euclid's approach is
useful in that it identifies the essential elements of a theorem,
these elements can be the used to construct novel theorems by
combining them in innovative ways; think of a mathematical assumption
as a chemical element and a theorem as a useful molecule. However
there are a number of problems resulting from the way mathematics is
presented. One effect is encapsulated in Kant's argument that
synthetic a priori knowledge was possible. Kant used the example of
Euclid to argue that it was because he had assumed Euclid had deduced
the theorems from first principles. This is significant in that this
fallacious argument was a foundation of Kant's rejection of Hume's
claim that a necessary cause of an effect could never be identified.
Another effect is it provides a model for a powerful rhetorical form
that is persuasive, it was used in particular by Hobbes and Spinoza
while Aquinas' writing has been compared to mathematics. Today
'mathematical' proofs that 1=2 are commonplace. More significantly
this 'mathematical' approach was used by Hobbes to argue that if a
highwayman offered you the choice of 'your money or your life' and
you handed over your money, you were giving consent. It is not easy
to discern flaws in these 'mathematical' arguments, and this is the
day to day job of research mathematicians (a social scientists once
Tweeted they had had a productive day, reviewing three papers: as a
mathematician it will take me a week of hard graft to review a 10
page paper).

The effect in
economics is most clearly seen in Friedman's argument, in the
Methodology of Positive Economics, that the validity of an
economic theorem should not rest on the realism of its assumptions.
I will not dismiss Friedman as the arch-priest of neo-liberalism as I
think the argument he makes has some merits (he focuses on the
empirical outcome and would normally be regarded as 'anti
mathematiciastion'). The attitude he shares with most economists,
along with Kant, Hobbes and Spinoza, is that a 'mathematical'
argument flows from assumptions to conclusions. A mathematician
approach would be to try and tease out the correct assumptions from
the observed behaviour. I would prefer the problem to be re-cast as
"By fetishising synthetic a priori knowledge, economists
turned economics into a highly paid pseudoscience".

The next question is
why do economists do this. The answer is rooted in the observation
that the 'mathematical' approach is powerful rhetorically: you can
use it to convince everyone of almost anything, providing you can
make the chain of arguments tricky enough to follow. From a
philosophical perspective, Kant distinguished the ‘lower
faculties’, such as mathematics, that would consider matters of
pure reason independently of the concerns of the state from the
‘higher faculties’, engineering, jurisprudence, medicine and
theology, were concerned with matters of authority and would be
regulated and monitored by the state. If economics is mathematical
it should inform the state, not be directed by the state, if it is
not then it will have the same status (and funding) as theology (and,
one would suppose, other modern social and human sciences).

More practical
motivations were characterised by Frank Knight, who, around 1920, felt
that economics had split into two strands. There was a mathematical
science, which studied closed systems based on distorting
assumptions, and a descriptive science, which could deduce nothing.
Economics needed to take a middle path that was both realistic and
informative. However, before the Second World War, most economists
doubted the usefulness of mathematics in addressing problems
involving radical uncertainty and human volition, such as the
economy. These attitudes changed when it was seen that mathematics
had transformed how the war, a similarly uncertain and human
activity, had been fought; operations research, cryptography,
supporting the physics of radar and weapons. Based on this
experience and government faith in mathematics, economics began
presenting itself as a mathematical science after the war. Two
publications of 1944 led this transformation: The Probability
Approach in Econometrics by Trygve Håvelmo and The Theory of
Games and Economic Behavior by John von Neumann and Oskar
Morgenstern.

Håvelmo argued also
that if economics wanted to be taken as seriously as physics,
chemistry and biology, it needed to employ probability because that
was the way that opinions were expressed in science. He believed that
if this was done, economics would make new insights, just as
physicists and biologists had. He also observed that the natural
sciences had found a perspective on nature that made it appear to
follow stable laws. The goal of The Probability Approach in
Econometrics was to present how this could be realised.
Morgenstern began The Theory of Games, like Håvelmo, with an
argument for the use of mathematics in economics and explained that
what was required was the careful definition of terms, a
pre-requisite of mathematics but lacking in economics. To this end,
von Neumann started with the axioms of utility that had been at the
core of Carl Menger’s, unmathematical, economics.

When Håvelmo was
awarded the Nobel Prize for Economics in 1989 he reflected that his
aspirations for introducing mathematics to economics had not been
met. He identified the primary issue as being that the economic
models that ‘econometricians’ had been trying to apply to the
data were probably wrong. More fundamentally, economics never
generated new mathematics ‒ ways of seeing relationships ‒ in the
way that the physical sciences had stimulated developments in
mathematics. Economists had simply adapted concepts from other fields
to their own devices.

To my mind, Håvelmo
captures why mathematics is not unreasonable effective in economics.
It is because economists use mathematics as 'part of the plumbing', a
rhetorical tool to convince an audience of an argument. The Unreasonable Effectiveness of Mathematics in the Natural Sciences is
founded on the fact that the natural science use mathematics to
figure out relationships. The one exception to this rule (that I am
aware of) in modern economics is the Fundamental Theorem of Asset
Pricing, formulated by Harrison, Kreps and Pliska around 1980 (I
dismiss game theory as this was originated in the early 1700s). The
FTAP is analogous to the Mercator projection, it describes the basis
on which models (maps) are made that guide probationers (navigators).
“A market admits no arbitrage, if and only if, the market has a martingale measure” establishes
a relationship.

Once mathematics has
delivered ways of identifying relations in physics, 'invariants' can
be identified, such
as momentum, energy or the speed of light (Noether's Theorem is
critical here). Physical theories are then tested on the basis of
whether or not they adhere to a particular conservation law. Because
economics is disinterested in using mathematics to identify
relationships it has been unable to accomplish the next step of
discovering invariants. It has tried, notably by sometimes hoping
'money' is an economic invariant.

In writing Ethics in Quantitative Finance (the points made here are expanded upon in the book) one of my aims was to think of
finance as a mathematician. That is to consider the fundamental relationship, as expressed in the FTAP, and then think
about what this implies as to the fundamental invariant. My
conclusion was that reciprocity - and equality between what is given
and received - is the invariant and I explore why this might be so.
The hope is that finance and economics can actually achieve something
useful for the wider community.

Friday, 23 June 2017

My book, Ethics in Quantitative Finance, was motivated by the wish to understand the relationship between mathematics and financial ethics in the aftermath of the Credit Crisis (GFC). While the GFC occured a decade ago, the topics discussed in Ethics in Quantitative Finance are still relevant today as the UK endures a "Great Political Crisis", a year after voting to leave the European Union. Had someone drawn a connection between mathematics, ethics and politics for me in 2006 I would have ignored them, suggesting that the scholarship underpinning the book is transformative.

A fundamental insight made in the book is that when market-makers (jobbers or dealers) give a bid-ask quote, they are offering an opinion and so money is behaving as a language that carries that opinion in prices. On this basis, I employ Habermas' theory of communicative action and in this context the book describes how mathematics ensures the objective validity of a price by ensuring reciprocity, the dual quoting ensures sincerity and the truthfulness of the price while the social rightness is delivered by charity. I argue that these norms, truth, truthfulness and rightness, are developed in commercial practice and provide the basis for democratic discourse. That is, sound politics are a consequence of sound commerce and I provide examples in pre-Socratic Greece, the emergence of bourgeois communes in high medieval Europe and seventeenth century Britain and the Netherlands. I also highlight that there is a symbiotic relationship between finance and politics: sound finance delivers sound politics, sound politics deliver sound finance. Pre-Socratic Greeks understood that if there emerge wealth inequalities the political stability collapses but mathematics, by ensuring reciprocity, inhibits the emergence of inequality, and this is a theme returned to throughout the book.

The idea that reciprocity is deeply embedded in financial economics was fully formed by around 2011 - the RCUK, the UK government's research administrators, identified the idea a sa "Big Idea for the Future" seven years ago. Explaining the significance of reciprocity took longer and was undertaken as I experienced the Scottish Independence Referendum campaign that lasterd from September 2013 until the vote in September 2014, the general election of 2015, the EU referendum campaign of 2016. The general election campaign of 2017 highlighted the connections between the GFC and the current political crisis.

The Scottish Independence Referendum campaign was widely lauded (by English commentators) as a good example of public engagement in politics. As someone voting in the referendum I regarded it as a complete failure of politics. On one hand, the nationalists promised the electorate milk and honey in an independent Scotland, what became labelled a manifesto of hope. The unionists prophesied doom and destruction. In terms of parenting, one approach was to offer a child a toy to behave, the other was to threaten to take a way a toy if the child misbehaved. There was no actual discussion of what was the best policy, in terms of the metaphor t, the parents did not explain why they wanted the child to behave in a particular way.

This was encapsulated in the debate about the currency of an independent currency, and was the point on which I judged the validity of the arguments. Alex Salmond asserted that Scotland would use the UK pound, as the obvious alternative of adopting the Euro was unpopular. Unionists pointed out that Scotland would never be independent of England if it retained the UK pound. What annoyed me was the referendum campaign did not discuss the relationship between money and sovereignty they, and the unionists, simply made assertions as to an unknowable future in an attempt to accumulate votes.

I understood the campaign in terms of a simple mathematical model of decision making under uncertainty that I often describe. During a British winter, some birds need to eat up to 40% of their body weight to survive the night, and so their very existence depends on
making the right decisions about looking for food. Let's say a bird has
6 hours to find 9 berries and it has two choices:

[Play it Safe] The bird stays where it is, where it knows there are
berries in the hope of finding a few. The chance of finding one or two
berries in the hour is 50:50.

[Take a Risk] The bird flies off, in the hope of finding
berry-bonanza but with a high chance of only finding enough to replace
the energy lost in flying. The energy cost of flying is one berry and
the chance of only finding the one berry in the new field is 5 in 6, but
there is a 1 in 6 chance of finding 10 worms (and getting an excess of
9).

Notice that the expectation of both strategies is the same,
one-and-a-half berries in an hour and so the bird can expect to get the
nine berries in the six hours. However the second approach is riskier
(for any concave utility function the expected utility of the second
strategy is always going to be less than the first). However, if the bird has only found five berries after five
hours, it is certain to die if it does not switch to the risky strategy,
where it has a small chance of finding the 10 berries that will ensure
survival. A similar argument applies if the bird has found more than 8
berries after 5 hours - it can afford to take a risk.

The financial interpretation is that only the middle class should be
risk averse the rich can afford to gamble, the poor have nothing
(substantially) to lose by gambling but there is the small chance they
become rich. This is an explanation as to why the poor defy economic
'rationality' in buying lottery tickets, it is actually practically
reasonable. In Ethics in Quantitative Finance I suggest that the adoption of utility in the nineteenth century was motivated by the rich de-legitimising speculation by the poor, since the poor can become rich through speculation. Today, economists like to obscure this simple mathematical model under the veil of "prospect theory" or the S-shaped utility functions of Friedman & Savage.

On this basis I understood the nationalists inviting the Scottish voters to take the risk while the unionists were conforming to neoclassical economic theory and arguing the risks were too great. Neither side was actually that interested in undertaking the political task of converging on a settled view of how Scotland should be governed. Three years on, nothing much has changed here.

Three weeks ago, at the beginning of June, I had dinner with an old friend from my undergraduate studies who happens to be an external examiner for some of our MSc programmes. We had had a similar dinner last year in the run up to the EU referendum and this year's dinner took place a week before the 2017 general election. My friend's parents were immigrants from Cyprus and he dismissed the EU referendum as being indicative of the UK's xenophobia. I disagreed, and went further to argue that it was just such attitudes by the British 'professional' class that led to the Leave vote. I pointed out that, according the authoritative National Centre for Social Research, around 30% of Black and Asian voters voted to leave the EU while only 20% of the electorate as a whole regarded immigration as the main issue in the vote. If you look at data the Leave voters were predominantly those poor in property, income and education. The Leave campaign was identical to the Scottish nationalist campaign in promising milk and honey to the marginalised in a Brexit Britain: vote Leave, you have nothing to lose but might gain.

The prime example was "An extra £350 million a week to the National Health Service", which appealed directly to the poor. In the aftermath of the EU referendum the professional classes, those who are going to be risk averse, began discussing living in a "post-truth" world were facts no longer play a role in peoples' decision making. The fact that these arguments ignore is that at there were no "matters of fact" pertaining to a post referendum Britain. The Remain campaign mimicked the unionist campaign by calculating, to the nearest hundred pounds, how much worse off the average British family would be if it voted Leave. This "fact" was as implausible as the "fact" that more money could go to the NHS, and I think the electorate recognised this and so the vote came down to taking the risk, or not. Bres-xit won, when Yes (to Scottish independendce) lost because Brexit unified those above and below the "risk averse" region, wheras Yes isolated those below the "risk averse" region and did not appeal to those above it.

At the heart of Ethics in Quantitative Finance is the idea that decisions about an uncertain future cannot rely on "matters of fact"relating to how nature is, what Locke described as physica, but on "judgement of the will", or practica. Contemporary mathematics is closely associated with physica, but as I explain in the text, before the mid-nineteenth century mathematics concerned itself with both physica and practica. A key episode in the diminution of practica in maths was the abandonment of moral expectation to solve the Petersburg game in favour of idealised utility functions.

My submission of the manuscript to Palgrave in early April was closely followed by the calling of the 2017 general election. At the time my reaction was that the Prime Minister had reflected on the forthcoming Brexit process, decided it was going to be impossible and so called an election in the expectation that the Conservative government would lose. This was regarded as absurd at the time given the lead the government had in the polls in April, a perspective confirmed by the local and Scottish government election results from the beginning of May.

The aim of the British Prime Minister in calling the election seems to have been to secure a mandate that would enable her to direct the Brexit negotiations as she wished. In essence it was to accumulate as many votes as possible while the objective of th eLabour party was to prevent her doing so. There was no substantial discussion of policy choices or the implications of those choices.

This reminded me of the environment in finance in the run up to the Credit Crisis. Financial institutions were focused on reaping profits from investing in MBS of sub-prime mortgages, confident in the concrete number of market prices without reflecting on what those numbers implied. It seems that in the sprinf of 2017 the Conservative government was focused on winning votes, confident in the concrete number of opinion polls without
reflecting on what those numbers implied. They saw a substantial lead and a "majority" in favour of Brexit without understanding where that majority originated.

The political turmoil the UK is experiencing is, like the Credit Crisis, as consequence of politicians (market participants) not being objectively true, subjectively truthfull and socially right. The problem originate in the GFC. In its aftermath, government policy has quietly supported the wealthy, through bank bailouts and price support delivered by QE, while loudly calling on the less well off to "tighten their belts". The crisis will continue so long as the public do not trust finance or their politicians.

Monday, 12 June 2017

My previous post was born out of my frustration that some feel that there is a 'clash of cultures' that will inevitably lead to conflict between east and west/Islam and Christianity. My view is that within Europe, the Middle East or China there are tensions between liberalism and authoritarianism with any society being susceptible to becoming dominated by either strand. Every individual needs to decide whether to place there faith in authoritarianism or liberalism, a decision which will be dominated by their experience.

I believe a person's attitude to uncertainty will be fundamental in determining their view towards liberalism or authoritarianism. Cheryl Misak explains the argument: if the future is unpredictable one must be liberal and open to any point of view, since a minority view might actually be the best. If the future is predictable then one should place faith in those most competent at predicting the future.

Some ancient historians highlight how Mesopotamian society was founded on unpredictability while the opposite was true for Egypt, and this had profound effects on their cultures and religions.

Mesopotamia is a flat flood plain surrounded on three sides by mountains and to the south by desert.

The region, as an alluvial flood plain, was extremely fertile. However it was susceptible to devastating floods, which tended to come at the end of the crop growing season, that could destroy communities. The Mesopotamian civilisations were also vulnerable to invasions from mountain tribes, such as the Hittites from Anatolia to the north or Medes from the Zagros to the east. As a result Mesopotamian religion sought to understand capricious gods and learn to predict their behaviour. This motivated the development of astronomy supported by mathematics.

Ancient Egypt also survived because of a river, the Nile. The civilisation developed a few miles either side of the river and its delta, surrounded by desert that isolated the Egyptians from other civilisations. Unlike the Tigris and Euphrates, the Nile followed a predictable cycle, flooding annually in a controlled manner. Rather than bringing destruction, these annual floods rejuvenated the region just as it seemed to become gripped by drought. A consequence was Egyptian civilisation was relatively static with a religion that focussed on cosmic equilibrium and

The difference between Egyptian and Mesopotamian approaches are highlighted in their different conceptions of the afterlife. Egyptians believed that if individuals had lead a moral life such that they could pass the judgement of the gods, then their soul would enter paradise on death. Because the natural world followed stable, predictable patterns, there were regular laws of nature and it followed that there were clearly defined laws of morality, which must be observed. The Mesopotamian afterlife was a dark, desert-like underworld devoid of water or food; the dead ate dust. Everyone ended up in this heel, whether they had been good or bad, reflecting the capriciousness of life.

Essentially, the Egyptian conception was based on justice: if a person leads a moral life they will be rewarded. The Mesopotamians, on the other hand, did not assume an individual gets their just deserts.

I feel that much of the discussion around 'economic justice' presupposes that the world is governed by stable laws that represent an ideal (traditionally, the divine) and this means that choices can be judged as either good or bad. I am not convinced such stable laws exist in societies and so clear cut judgements are difficult to arrive at.

I started thinking about these ideas after I spoke at the Edinburgh Science Festival and an audience member was angered by my lack of attention to the problem of wealth inequality. They asserted that money should be distributed "democratically" and seemed to be under the impression that, as a mathematician, I claimed to have deduced a way of "fairly" distributing wealth. As someone who is extremely sceptical that economics follows any identifiable patterns, just as the Mesopotamians seem to have rejected the idea that there are stable laws of nature, this has never been my objective. What I am interested in is what is the role of mathematics in finance. My conclusion is that financial markets are arenas in which parties work towards coming to agreement. This means that to work well they must be governed by discursive rules, rather than traditional norms about what is "good" or "evil". I adopt Habermas and argue that statements in finance, prices quoted, must be true, truthful and right. They must conform to objective, subjective and social truth criteria. To this end I argue that reciprocity determines the objective truth of a price and is linked to mathematics, while sincerity addresses the subjective truth and charity delivers social rightness. Together these norms lay the foundations for trust in finance.

I can’t point Noah towards a book that explains the clash
but for the past year I have been working on Ethics in Quantitative Finance
which sheds some light on the topic, but from a different perspective.The
aim of the book is to investigate the relationship between mathematics, finance
and ethics.The initial findings were
unexpected for a mathematician.They
revealed that there was a recurring theme that finance drove the development of
science and democratic politics.The
book was written in the context of an emergence of intolerant populism that I
experienced during Scottish Independence Referendum of 2014, the UK EU
Referendum of 2016 and the US Presidential Election.

I became interested in Islam on the evening of 9 November
1989.I was living in London as a recent
graduate working for an oil company and, watching the collapse of the Berlin
Wall with my two flat-mates we came to the conclusion that, following the
collapse of Communism, tensions would emerge between Islam and the West,
bearing in mind the two cultures had been allied against the Soviet Union for a
decade. The following weekend I bought
Lapidus’ A History of Islamic Societies
and spent the following decade forming a positive opinion of the culture, not
least because in the early 1990s I spent about 6 months in the UAE.

A point struck me while reading a biography of Sir Richard
Francis Bacon.For most of Bacon’s
lifetime, married women in Britain could not own property, it was all owned by
their husbands.This was not the case in
Islam, with the famous example of Muhammed wife Khadija.Rather than this custom being seen as
progressive by Victorian Britain, it was regarded as another manifestation of
the effeminacy of Islam and part of the justification for Europe’s dominance of
Islamic states, from North Africa to East Asia.Islam’s toleration of sexual diversity was another manifestation of this
effeminacy.Burton’s career in the East
India Company was curtailed by his exploration of homosexual brothels and he
coined the term ‘Sotadic zone’, which broadly coincided with the predominantly
Muslim lands he was familiar with. In
Wilfred Thesinger’s 1920s books on Arabia there is discussion of mukhannath and mustergil, people who are transgender and long accepted in Arabic
society.

These portrayals of Islam are diametrically opposite to
contemporary attitudes.Today it is the
west that tolerates sexual diversity and gender equality while Islam is
presented as repressive.My conclusion
was, and is, that Islam provides a convenient embodiment of “the other” where
by specific examples of how Islam is opposite to the West come to dominate how
the west sees Islam, while the similarities are ignored.Many Muslims regard Friday 13th as
the holiest day (the Arabic letter ‘M’ for Muhammed is the 13th in
the alphabet); in the west it is regarded as unlucky.

Both Islam and Christianity are built, substantially, on
foundations laid by Greek philosophy.One account (I think it is Unveiling Islam) of the difference is that Islam is rooted in the intellect ‒ it is
logical to be a Muslim – where as Christianity is distinguished by its
foundation on ‘charity’ (love). This
suggests that there is more in common between Islam and Christianity as there
are differences this does not imply that there is not a ‘clash of cultures’,
just that the clash is more complex than Christian v. Muslim or ‘East’ v.
‘West’.

Greek culture that emerged around 600 BCE became known for
being distinctive in its attitudes to politics and science.Greek science developed a non-mythical
cosmology. The central idea emerged in
Miletus, in Anatolia, and was apeiron
(‘without limit’), something boundless, homogenous, eternal and abstract yet it
held and motivated all things.Simultaneously, across the Aegean in Athens, Greek ideas of democracy
were codified.The standard explanations
used to argue that the non-mythical cosmology originated in the polis where citizens were equal and
ruled by an impersonal law: democracy generates science.This account did not acknowledge the temporal
simultaneity of the origins of the ideas but there geographical
separation.There needed to be something
that preceded democracy and science common to both Athens and Miletus.

A more empirical explanation for origin of the distinctive
nature of Greek politics and science lies in the Greek adoption of money in
everyday use.

Money can be seen as a prototype for the apeiron.Money is ‘fungible’, meaning one money-token is indistinguishable from
any other, it is an empty signifier, like a word used in everyday
language.The impersonality of money
means that it is universal and makes no distinctions; it is used by rich and
poor uniting opposites.There is a
discrepancy between the value of money and its commodity value because money an
abstract concept signified by a concrete token.Because it is abstracted, unlike any substance, money is unlimited.It has the power to transform objects, being
able to turn wheat into wine in the market.Together, these properties enable money to perform multiple functions
simultaneously. It is used to meet
social obligations, such as tribute, legal compensation, and is the dominant
means of conducting exchange; it stores value and is the unit of account.Money’s myriad uses means that it becomes a
universal aim of all members of the community using it.

Money centralised social power in a single, abstract and
impersonal entity.In monetised, Greek,
economies personal power arose from the possession of impersonal and
non-substantial money.The impersonality
of Greek money nurtured the concept of equality, which is the foundation of
democracy.The Greek word nomos, associated with ‘law’, is the
root of the Greek word for money, nomisma.When combined with ‘auto’ – self – it gives
autonomy, the idea that people can govern themselves and out of it, the concept
of the individual emerges.

The foundations of Athenian democracy where laid by Solon
(c. 638‒558) when he instituted several legal reforms.These sought to address instability created
by conflicts in society caused by growing inequality created by the
financialisation of society.Solon’s
reforms solved the problems by substituting judicial violence with fines,
something that was only possible because money was widely used.In the process, justice was depersonalised so
that hostility between people was replaced by an impersonal quantification
between an injury and its compensation.While money was disruptive of society it was also integral to Solon’s
reforms that created a political system in which all citizens were equal.

Greek’s highlighted how their culture was distinctive from
that of their neighbours, notably those in the civilised East.The Greeks contrasted Solon’s democratic laws
to those of the Median tyrant Deioces .The Greeks assumed that the Medes had originally lived in autonomous
towns but Deioces determined to unite them under his rule.He achieved this by gaining a reputation as
an honest judge and then stopped giving judgements.The Medes were so desperate for his decisions
that they offered him the crown.On
achieving his objective Deioces ordered his subjects to build him the palace of
Ecbatana, surrounded by seven concentric circular walls of different colours
with the inner most being silver then golden.Deioces hid himself from his subjects in the palace and ruled through
messengers using a network of spies to monitor the kingdom.The Greeks compared Solon’s position as
impartial arbiter in an open court to Deioces’ despotism, where the judge was
hidden.

The essential difference was that Greek society was
monetised and operated through inter-personal exchange where as that of the
neighbouring societies were re-distributive.In re-distributive societies, power originated in the gods.Priests (or a king, the distinction was often
blurred) were the direct servants of the gods who mediated between the
population and the divine.All that the
community produced was owned, exclusively, by the gods and managed by a
hierarchy of priests/kings.Produce was
delivered to the temple (or palace) and the priests, from behind closed doors,
would re-distribute the aggregate production per their own rules, taking a cut
for their own use.In return, the
priest/kings were expected to provide material and social security: food
stores, walls, law and order.These
societies maintained themselves so long as the priest/kings prevented famine
and ensured peace and justice.It was
passed through the priests/kings into the community through a clear
hierarchy.The transference of power was
often done through seals (amulets, talisman) that magically carried the power
of the god.

Greek religious practice diverged from this standard
model.The Greek gods lived on ambrosia
and nectar, not on mortal food.When
Homeric Greeks, in around 800 BCE, performed an animal sacrifice the smoke
‘honoured’ the gods, who were not located in their icons but ‘somewhere else’,
alienated from the people.The
sacrificial meat was then shared out amongst the community.The fairness of this sharing was fundamental
to Greek culture, with both the Iliad
and the Odyssey resting on problems
resulting from unfair distribution.Consequently, the wealth of the Greek temples was owned and managed,
inclusively, by the community in an egalitarian manner, in contrast to the
wealth of temples in re-distributive societies.There is a relationship between these Greek religious practices and the
emergence of money in Greek society.The
lowest value Greek coin was the obolos
that took its name from the cooking spits (obelos)
that were used to distribute sacrificial food and it is almost certain that the
word drachma comes from obeliskondrachmai ‒ handfuls of spits.

The Odyssey
focuses on the Greeks’ sense of identity and emphasises the humanity and
individuality of Greek society.It
describes the transformation of Odysseus from an aristocratic warrior to a
democratic leader and represents a metaphor for the transformation of Greek
society from a hierarchy to a democracy.It begins with Odysseus and his followers leaving the defeat of Troy and
brutally attacking the Cicones.This
indicates that they have been traumatised by their experience of war and need
to be tempered before returning to the ideal of Ithaca.After attacking Cicones, the company arrive
on the island of the Lotus-eaters.Here
the traumatised fighters can eat the lotus and fall into oblivion.However, Odysseus chooses not to succumb to
the intoxication, rather he introduces the key theme of Greek philosophy of
reflecting on life and acting rationally.This is essential in establishing an individual’s identity.

The next episode is the story of the Cyclops and is an
example of a rebirth myth, where the hero enters a tomb/womb and is
reborn.Odysseus’ inquisitiveness leads
him to enter the cave of the cyclops, Polyphemus.The cave is full of food (cheese-symbolic of
animal husbandry).Odysseus intends to
exchange the cheese for wine but the cyclops does not understand the tradition
of exchange and starts eating Odysseus’ while trapping Odysseus and the rest in
the cave.Odysseus realises he cannot
defeat the cyclops using brute force, but must employ intelligence, in
particular dolus (trickery, cunning)
which is bestowed on Odysseus by Athena.Odysseus’ plan is to offer Polyphemus wine as a gift (as distinct from
in exchange), get him into a drunken stupor that will enable the crew to blind
the cyclops and escape.The meaning is
that Odysseus is reborn as a thinker not a fighter and as a thinker he can
defeat the myopic cyclops.

The encounter with the cyclops introduces the political
theme of the Odyssey: should people be ruled by petulant autocrats supported by
an aristocracy of warriors or by thinking individuals who can rationally solve
problems.The fact that Odysseus is
still short of the ideal is demonstrated in the next encounter.The crew stay with King Aeolus who gives to
Odysseus a bag containing the winds that will prevent their ship returning to
Ithaca.However, Odysseus does not
explain the gift to his crew.They think
the bag contains gold that Odysseus is keeping for himself.While Odysseus sleeps the crew open the bag
to share out the gold, releasing the winds that blow them away from their
destination. Odysseus and his crew are
punished for not trusting each other.

Odysseus has further experiences that temper him.The most profound being his trip to the
underworld where he encounters the dead warriors from Troy, Achilles, Ajax and Agamemnon.Achilles tells Odysseus that he would prefer
to be a living servant than a dead hero.This enlightens Odysseus who, having returned from Hades, is able to
resist the temptations of the Sirens’ offer of fame and glory and ends up on
the island of Ogygia, captured by the beautiful nymph Calypso.Calypso offers Odysseus immortality and a
life of pleasure, but she also represents death, in the same way that the
oblivion of the lotus eaters is vacuous.After seven or so years, Athena persuades Zeus to order Odysseus’s
release and the hero escapes on a raft.After all these trials, Odysseus has been transformed into a judicious
individual and is able to return to Ithaca disguised as a beggar, the polar
opposite of the aristocratic hero.

The difference between the Greek (democratic,
individualistic) and Persian (hierarchical, re-distributive) cultures is
exemplified in Herodotus’ description of the first contact between Athens and
Persia in 507 BCE.The Athenians were
seeking Persian protection from the Spartans and initiated negotiations based
on their experience gained in the agora, the main meeting place of the polis that also severed as the market (agora, forum in Latin), as that of equals.This was inconceivable to the Persians who maintained a hierarchical
state that ruled from the Indus valley to Anatolia.The Persians promised to support the
Athenians in exchange for them ritually offering earth and water.After some discussion, the Greeks
agreed.They had not realised that they
were symbolically submitting Athens to Persia and would be punished if they did
not comply with Persian demands in the future.Following this misunderstanding, it was inevitable that the Persians
invaded Greece in 490 BCE.Despite the
material odds stacked against them, the Greeks, in the Delian League led by
Athens, first defeated two invasions and then pushed the Persians out of much
of the eastern Mediterranean by 449 BCE.

While the clash of cultures is not geographical (western v.
eastern) or religious (Islam v. Christianity) but societal, relating to a
difference in ideology between monetised societies based on reciprocal exchange
resting on individual judgement in a democracy and those based on hierarchical
distribution of resources based on autocratic, often hidden, decision
making.Within Europe this conflict repeats
itself itself.It is central to the
Reformation, caricatured as between Calvinist merchants and Catholic
aristocrats.In England, there is the
Civil War, that ends with the Commonwealth, the Anglicisation of the Latin res publica, followed by the political
divide between Whigs and Tories. The
United States is the exemplar of Whig political philosophy, rooted in Locke’s
empirical political theories.

The perennial question is why should an unstable monetised
society (capitalist) be preferable to a re-distributive one (communist).The answer depends on whether you believe the
future is predictable or not.If you
believe that science can tame uncertainty the implication is that the optimal
allocation of resources can be determined by a central authority, such as
Deicoes.If, on the other hand, you
believe the future is not knowable, you cannot rely on the calculations of the
auto/techno-cracy.Instead it is best to
allow anyone to participate in decision making in order to enable the best
solution to be identified.

This point was made by Moses ben Maimon, the twelfth century
rabbi from the Almoravid Islamic Empire. The Bible explains suffering on the basis that
people were expelled from the Garden of Eden.This is usually interpreted as going from plenty to scarcity into a
world of scarcity but ben Maimon argued that God’s punishment was not so much
about scarcity as uncertainty.In the
Garden of Eden, humans had perfect knowledge, which was lost with the Fall, and
it is the loss of this knowledge which is at the root of suffering: if people
know what will happen they can manage scarcity.Up until the nineteenth century, it was widely accepted that the world
was fundamentally uncertain.This was
expressed in Aristotle’s acceptance that there was a class of phenomena not
amenable to science, the Scholastic’s acceptance that God could defy the laws of
nature and Locke’s belief that knowledge would always be doubtful.

Spinoza, a Jewish marrano
living in Amsterdam in the mid-seventeenth century understood Greek philosophy
through Judaic and Islamic interpretations had argued that the Olympian
perspective of the scientist made the world deterministic.He argued that people believed themselves to
have free-will and had autonomy because they did not see the complete picture,
being only finite.Spinoza believed that the purpose of the
individual was to lift themselves out of a mundane perspective
so that they could understand the totality of creation, coming to understand
the true nature of God’s will: the laws of nature.The ethical nature of the Ethics was in describing how different
actions helped, or hindered, the individual in approaching God, which would
give the correct perspective on everyday phenomena.Spinoza believed that at the most
basic level people had direct knowledge of nature through their senses.This could be improved into a scientific
knowledge of the world that showed connections between phenomena and so could
make generalisations.The goal was to
have direct knowledge of the generalisations, not mediated by ‘finite’ ideas or
concepts and this knowledge delivered true freedom.

Spinoza’s contribution to western philosophy was in
suggesting that humans can reach a complete picture of the universe that delivered
certain knowledge.This was novel to
Europeans rooted in the Scholastic tradition that synthesised Aristotle and Catholicism.However, it was reminiscent of Jewish and
Islamic mysticism.Jewish mysticism ‒
Kabbalah ‒ had become prominent in the thirteenth century through Moshe ben
Naiman Girondi,
from Catalonia, while Sufi thought was legitimised in the eleventh century by
the Islamic scholar al Ghazali.Both
these scholars challenged Hellenistic philosophy, with al-Ghazali’s repudiation
of Aristotle in The Incoherence of the
Philosophers being pivotal in the development of Islamic thought.Associated with al-Ghazali was the doctrine of
‘occasionalism’, that effect follows cause not because of a physical law but
only because God’s will.Spinoza echoed
this attitude when he argued that a law of nature was simply a consequence of
God’s ‒ or nature’s ‒ consistency.In
Sufi metaphysics, there is the concept of ‘Unity of Essence’ (wahdat al-wujud, وحدة الوجود) and the idea that people seek
‘annihilation in God’ (fanaa, فناء‎‎)
just as for Spinoza people sought a God-like perspective.While Islam and Spinoza both denied contingency, they
did not deny the ability of the individual to assert their own will, it was
just that asserting one’s will against God ‒ or nature ‒ would be detrimental
to the individual. This idea of determinism was unusual in European
thinking.The Greeks (especially in the
Oedipus myth) and Calvinists believed in predestination, that the fate of a
person’s soul was destined , but an individual had will
throughout their life.Spinoza’s
argument was that individuals do not have a choice in correct action; knowledge guides them to the correct
course.If someone makes an immoral
choice, it is through ignorance.

As a mathematician ‒ that is someone who sees an equivalence
between a donut and a coffee cup ‒ there is no real clash of cultures between
Donald Trump and Salman bin Abdulaziz, they are equivalent in representing
non-democratic rulers.While it seems
incongruous that the President of the US is accompanied on state occasions by
his daughter and son-in-law and that he is above the rule of law, this would be
normal for an absolute monarch.Modern
populism involves an economic shift to the left accompanied by a cultural shift
to the right.It does not really matter
if this is in Russia, India, Saudi Arabia, Britain or France.The opposite of this populism is pluralistic
debate rather than simple panaceas, which are destined to fail.

The ‘deficit model’ is the idea that if the public understood
scientific concepts they would accept the judgements of scientists.
Or, if scientists shout loud enough eventually people will agree with
them. Or, people don’t like GMOs/fracking/climate change science
because they are dumb.

This is a hot-topic in the aftermath of the US Presidential Election
and theUK’s EU Referendum, when ‘experts’ were widely ignored
and her contribution has been well received.

My reaction to Brigitte’s tweet was Spinoza of course, but
there was no reference of the seventeenth century Dutch philosopher
in her piece.

My interest is as part of my remit as the RCUK Academic Fellow for
Financial Mathematics between 2006 and 2011 was the ‘publicunderstanding of Financial Mathematics’, or at least the ‘public
engagement with Financial Mathematics’. This introduced me to the
issue of the ‘deficit model’ over a period in time dominated by
the ‘Great Financial Crisis, which started 10 years ago yesterday.

For almost ten years I have been trying to figure out what is the
relationship between finance, mathematics and ethics. To me, a
significant contributor to the GFC was the belief that ‘science’
had some how tamed financial risk. Therefore to understand the GFC
it was necessary to understand where the faith in scientific
determinism originated, and I think the source (in European science
at any rate) is in Spinoza. The argument is presented in the book I
am finishing off for Palgrave

and I have extracted two relevant sections, separated by some 27,000
words and 125 years.

Baruch Spinoza would produce the most influential development of
Descartes’ philosophy that incorporated ideas from de Groot and
Hobbes during the ‘Dutch Golden Age’. Spinoza’s family were
Portuguese Jews, marranos, who had been forcibly converted to
Christianity in the sixteenth century. They had immigrated to the
United Provinces in 1593, taking advantage of Calvinist toleration
and Baruch’s father became a prominent, and wealthy, citizen of
Amsterdam. Baruch was born in 1632, his first language was
Portuguese and he grew up studying in Spanish and Hebrew and he only
studied Latin in his twenties. His understanding of Greek philosophy
came primarily through Judaic and Islamic interpretations, rather
than from the Scholastics.

Spinoza became involved with the Collegiants, a sect that had emerged
as a successor to the Arminians, and was eventually excommunicated by
his synagogue in 1656, changing his name to Benedictus. The
excommunication did not worry Spinoza too much and he developed a
reputation as a teacher, writer and a lens-grinder, a skilled
profession closely associated with the important new science of
optics. Supported, in part, by a pension from de Witt, he developed
his philosophy and in 1670 moved to The Hague where he would witness
de Witt’s murder in 1672. He died in 1677, probably of
tuberculosis.

Spinoza’s most influential work, his Ethics, was published
posthumously in 1677. Spinoza echoed Plato, Augustine and Descartes
in arguing that mathematics provided the means of discerning truthi
and the text presented a deductive chain that proved propositions
having started with definitions and axioms. The key step that
Spinoza took in developing Descartes’ work was to collapse the
three types of substance: matter, mind and God, into one. This was
captured in his phrase Deus sive natura, ‘God or nature’,
indicating that there is only a single substance2
that, when viewed from one perspective is nature but from another is
God. This solved the problem of how Descartes’ mind interacted
with matter at the cost of prohibiting contingency3
because if everything was connected to God, it could not happen by
chance. This also meant that emotions were not part of the mind, and
so could not be rationalised, but were governed by the laws of
nature4,
as Hobbes had implied.

Spinoza argued that people believed themselves to possess free-will
and had autonomy because they did not see the complete picture, being
only finite5.
Spinoza believed that the purpose of the individual was to lift
themselves out of a mundane perspective in order to comprehend the
totality of creation, coming to understand the true nature of God’s
will: the laws of nature. The ethical nature of the Ethics
was in describing how different actions helped, or hindered, the
individual in approaching God6,
which would give the correct perspective on everyday phenomena.
Spinoza believed that at the most basic level people had direct
knowledge of nature through their senses. This could be improved
into a scientific knowledge of the world that identified connections
between phenomena and so was able to make generalisations. The
ultimate aim was to have direct knowledge of the generalisations7,
not mediated by ‘finite’ ideas or concepts and this knowledge
delivered true freedom8.

Spinoza’s contribution to western philosophy was in suggesting that
humans were capable of attaining a complete picture of the universe
that provided certain knowledge. This was novel to Europeans rooted
in the Scholastic tradition that synthesised Aristotle and Augustine.
However, it was reminiscent of Jewish and Islamic mysticism. Jewish
mysticism ‒ Kabbalah ‒
had become prominent in the thirteenth century through Moshe ben
Naiman Girondi, from Catalonia, while Sufi thought was legitimised in
the eleventh century by the Islamic scholar Muhammad ibn Muhammad al
Ghazali. Both these scholars challenged Hellenistic philosophy, with
al-Ghazali’s repudiation of Aristotle in The Incoherence of the
Philosophers being pivotal in the development of Islamic thought.
Associated with al-Ghazali was the doctrine of occasionalism, that
effect follows cause not because of a physical law but only because
God’s will. Spinoza echoed this attitude when he argued that a law
of nature was simply a consequence of God’s ‒
or nature’s ‒
consistency9.
In Sufi metaphysics there is the concept of ‘Unity of Essence’
(wahdat al-wujud, وحدةالوجود)
and the idea that people seek ‘annihilation in God’ (fanaa,فناء, ‎‎)10
just as for Spinoza people sought a God-like perspective. While
Islam and Spinoza both denied contingency, they did not deny the
ability of the individual to assert their own will, it was just that
asserting one’s will against God ‒
or nature ‒ would be
detrimental to the individual11.
This idea of determinism was unusual in European thinking. The
Calvinists believed in predestination, that the ultimate fate of a
person’s soul was destined for heaven or hell, but an individual
had will throughout their life. Spinoza’s argument was that
individuals don’t really have a choice in correct action; knowledge
guides them to the correct course12.
If someone makes an immoral choice, it is through ignorance13.
This is less bestial than Hobbes but still rejects autonomy.

If Judaism can be characterised by the covenant with God and
Christianity by God’s caritas for people, in Islam people
can be characterised by having an intellect that can discern God’s
will14.
In this sense Spinoza was introducing Islamic, specifically Sufi,
ideas into western philosophy. This was possible because Spinoza was
re-presenting tested Islamic philosophy that opposed Aristotle, just
as European thought was rejecting Aristotelian ideas.

The influence of Spinoza on western thought becomes significant at
the end of the Enlightenment. Romanticism had appeared in English
literature in the 1790s. It incorporated Rousseau’s idealisation
of the ‘noble savage’, in a ‘state of nature’, and
empiricism, which focused on the individual sensation of nature. In
Germany, the movement was broader and more significant with a
philosophical basis, idealism, in a problem Kant created in trying to
resolve the issue of mind-body dualism. Idealism addressed the
problems by dissolving the distinction between observers and
observed, an approach that was heavily influenced by Spinoza15.
A core concept in idealism was the principle that what was observed
was dependent on the thinking ‘I’ that, itself, could only exist
in the context of society. This spawned the idea that national
identity was fundamental to the individual, fusing Spinoza, Rousseau
and Kant.

Johann Wolfgang von Goethe, born in 1749, exemplified the broader
Romantic Movement. His fame was established with his 1774
sentimental novel Die Leiden des jungen Werthers (The Sorrows
of Young Werther). Today Goethe is known for his interpretation of
the Faust story, written in 1808, that describes how Mephistopheles
suggests that a ruler solved their financial problems by printing
paper money, backed by gold reserves, which were yet to be
discovered16.
In 1775 had been invited to become a civil servant for the small
Duchy of Weimar where he would remain a bureaucrat until his death in
1832. Goethe was responsible for some mines and became interested in
geology and the natural sciences generally. As a novelist, Goethe
was interested in the ‘narrative’ of science rather than brute,
individual facts, an approach that coincided with the idealists’
approach to science, Naturphilosophie.

Naturphilosophie was personified by the Prussian naturalist
Alexander von Humboldt. Humboldt travelled to South America between
1799 and 1804 and gathered observations of nature that he then
presented in Ansichten der Natur (Aspects on nature) in 1807.
Humboldt aimed at Spinoza’s all-encompassing perspective that
transformed an apparently capricious nature into a cohesive whole17.
However, this implied that science was fundamentally subjective,
with the scientist being part of, not an objective observer of,
nature18.
To ensure that the ideas coming out of the mind of a scientist,
often presented as a solitary genius, were true representations of
the world, their observations had to be precise and accurate. Johann
Carl Friedrich Gauss, the director of the Göttingen
observatory from 1807, addressed the fidelity of scientific
observations by developing the Central Limit Theorem into a theory of
measurement and the Normal distribution, which is often referred to
as the Gaussian distribution.

The Romantics regarded nature as a complex, ‘living’ organism and
were concerned with how nature changed, rather than focusing on how
it was at any single point in time19.
This represented a ‘counter-revolution’ in science, reverting to
Aristotelian qualities rather than Cartesian quantities. Some
Romantics, notably William Blake, were highly critical of the
mechanistic natural philosophy founded on Descartes and Newton20
and stressed the need for human imagination in theory construction.
With respect to Malthus, the Romantics saw his argument as reducing
people to elements of a machine and they preferred more paternalistic
policies, associated with the Tories.

Prussia had initially joined the attacks on Revolutionary France in
1792 but became neutral in 1795, content to see the Holy Roman
Empire, ruled by the Austrian Hapsburgs, disintegrate. However, in
1806, as Napoleon presented a greater threat, Prussia declared war on
the Empire and was swiftly defeated. In the aftermath of the defeat
the Prussian’s began a programme of reorganising the state
administration, inspired by Kantian ideals, whereby subjects would
become citizens21.
During this time, Georg W.F. Hegel developed idealism by arguing
that the nation was a living organism, with a purpose, will and
rationality22.
This contrasted with the dominant view of the eighteenth century
that saw the state as a machine designed to deliver ‘interests’,
a view that Hegel rejected for the same reasons that the Romantics
rejected mechanistic science. Hegel argued that the state’s will
was defined by ‘public opinion’ which expressed

the genuine needs and correct tendencies of common life, but also, in
the form of common sense, of the eternal, substantive principles of
justice23.

Hegel argued that the state and people were indistinguishable,
because an individual was formed in the context of culture, and so
their aims are necessarily compatible. In addition, he rejected the
idea that public opinion developed through discourse could be
meaningful, since it would only represent the subjective opinions of
a narrow section of the public24.
Therefore, like Rousseau, Hegel believed the well-constituted state
could not be challenged and the role of education was to ensure
people’s subjective opinions conformed to the state’s, Spinozian,
objectivity. This perspective can be contrasted with that of Thomas
Paine, who had argued at the start of Common Sense, an essay
of 1776 and a key inspiration of the American Revolution, that

Some
writers have so confounded society with government, as to leave
little or no distinction between them; whereas they are not only
different, but have different origins. Society is produced by our
wants, and government by our wickedness; the former promotes our
happiness positively by uniting our affections, the latter negatively
by restraining our vices. The one encourages intercourse, the other
creates distinctions. The first is a patron, the last a punisher.25

I suspect students of Spinoza and Hegel will object to my caricature, but I think the essential point that " Spinoza’s contribution to western philosophy was in suggesting that
humans were capable of attaining a complete picture of the universe
that provided certain knowledge." is important in understanding why 'science' believes in the 'deficit model'.

1
(Spinoza 2002, 240)

2
(Spinoza 2002, I.P14, 224)

3
(Spinoza 2002, I.P26, 232)

4
(Spinoza 2002, 277-278)

5
(Spinoza 2002, 238-241)

6
(Spinoza 2002, IV.P28, 334)

7
(Spinoza 2002, V.P25, 375)

8
(Spinoza 2002, 378-379)

9
(Spinoza 2002, 239)

10
(Davis 1984, 12)

11
Qu’ran 4:79, (Spinoza 2002, 359-362)

12
(Spinoza 2002, V.P42, 382)

13
(Spinoza 2002, IV.P27,334)

14
(Schuon 1976, 19-22)

15
(Frank 2003, 55-76), (Förster and Melamed 2012),

16
(Wennerlind 2003, 234), (Binswanger 1994)

17
(Daston 2010)

18
(Fara 2009, 215-218)

19
(Brush 1976, 655)

20
(Christensen 1982)

21
(Clark 2006, 327-344)

22
(Hegel 1952, Secs. 257-258), (Clark 2006, 451)

23
(Hegel 1952, Sec. 317), (Habermas 1991, 120)

24
(Habermas 1991, 119)

25
(Paine 1998, 5)

Brush,
S. G. 1976. The
Kind of motion we call heat: A history of the kinetic theory of
gases in the 19th century.
North-Holland.